SNP: a path to fiscal autonomy, but do the sums add up?

We’re at a moment of elite incomprehension over Scotland. When a magazine like the Economist berates Nicola Sturgeon for moderating her manifesto, calling it a “suicide note”, you realise how disorienting was the bomb the SNP dropped into politics with its manifesto yesterday.

Let us review the fiscal outlines of what the SNP proposes. It wants – as the IFS explains today – to take the amount of Scottish public spending controlled by Holyrood from its current level – around 7 per cent as calculated by the Institute for Fiscal Studies, to several tens of billions more.

If Westminster sticks to the principle of the Barnett formula, whereby further moves to devolution come with “no detriment” to Scotland, then any costs associated with such increased fiscal freedom would go on being funded by the taxpayers of the whole UK.

However, at the moment Scotland became fiscally autonomous – that is, raising and spending most of its taxes itself – the Barnett principle would be over. Then the gap between Scottish spending and taxation would appear as a transparent “Scottish deficit”, which as the IFS points out would be bigger, percentage wise, than that of the whole UK’s.

Specifically, if nothing else changed, an IFS report today says Scotland would be running a £9.7bn deficit by 2019, compared to a UK surplus. However the SNP’s case is based on the assertion that almost everything would change.

It wants to use its extra fiscal powers to create a different kind of economy in Scotland: one based on higher wages, more infrastructure investment and a Business Development Bank. By abandoning austerity – which it could only do fully with UK Treasury help – it believes it can stimulate rapid growth.

In response to the IFS report, the SNP’s Ken Gibson MSP said: “As the IFS acknowledge, these figures are before the end of the austerity that we want to see in order to grow the economy faster.”

Furthermore, the manifesto says that, once fiscally independent, the SNP would lock Scotland into a balanced current budget regime, running a surplus in order to accumulate a sovereign wealth fund, which would give it leeway in any future negotiations over independence.

Labour slammed the manifesto over the commitment to a budget surplus lock – saying this made the SNP a pro-austerity party; the Economist berated it for the absence of left-wing rhetoric; the Institute for Fiscal Studies questioned its assumptions on future growth. As I write, former PM John Major is reiterating the Conservative claim that the SNP has no right to be in a Westminster government.

Here’s my take on what’s doable in the SNP’s manifesto, and under what circumstances, and what it means for the next parliament as a whole.

Sterling union

First – like all mainstream politics – the manifesto is “monetary policy blind”. We saw in the #Indyref why this is not sustainable when it comes to discussing the Scottish economy. Monetary policy is the most important policy tool in modern capitalism and while it tends to “run in the background” like the operating system of your iPad, you can’t ignore it if you want to change things significantly. If Scotland became fully autonomous on tax and spend, the UK would effectively become a “sterling union”.

That’s not a deal breaker – but you would have to engage Westminster (and Cardiff) and the Bank of England in a prior discussion as to what the monetary policy of that sterling union is going to be, especially if your long -term goal was to create a sterling union of the British Isles, with a totally independent Scotland sharing the currency but nothing else.

The electorate is woefully underinformed about it, but monetary policy has been the main driver of UK recovery – and if Scotland is going to pursue a separate growth policy to the UK, you have to assume the Bank of the United Kingdom (as it would properly have to be called) was on board.

Second, how to square the three apparent aspirations: a) to go on spending more than Scotland is taxed; b) to run a balanced budget and c) to accumulate a sovereign wealth fund?

These three commitments only make sense if they are achieved in sequence. Hidden deficits are run via the Barnett Formula until fiscal autonomy; thereafter you lock in balanced budgets and aim for a surplus, and then you build up a sovereign wealth fund.

The only problem is: how do you do this without the moment of fiscal autonomy becoming a massive moment of austerity?

Unprecedented growth

The answer is through growth. But this pins all the coherence of the SNP’s fiscal policy on the assumption of unprecedented growth. Let’s assume global conditions are benign – through readers of this blog know my assumption is that for the next 50 years global growth will be meagre.

If there’s growth available in the British Isles, and in Western Europe, Scotland’s proto-autonomous economic policy would have to be geared to capturing more of it it through competitive means.

These, to be clear, in the modern context would be: inward migration – boosting the economy through boosting workforce size; inward investment, which would mean lower corporation tax and other business rates compared to the UK; a higher-wage workforce, which would mean different labour market rules; and massive infrastructure spending by the state to prime the pumps. In addition, you would need a permanently loose monetary policy.

These goals would be easier to achieve if you could externally devalue your currency, but unless an “out” vote in a 2017 EU referendum hands Scotland the opportunity to leave sterling and join the euro, that’s not going to happen.

In all cases, the autonomous, growth-oriented Scotland would find itself competing for growth with its nearest neighbours – England, Wales, Northern Ireland and the Irish Republic. In global terms – when it comes to attracting international flight slots or tech centres for IT multinationals – it would be in the same market as Luton, Stansted, Galway and Dublin.

More questions than answers

On all these issues the SNP manifesto contains more questions than it answers. On its concrete plans – education, health, study visas, infrastructure spending – it projects a clear alternative vision. But the fiscal dynamics behind it only make sense if there is differentially high Scottish growth.

In one sense, then, the SNP’s Westminster manifesto of 2015 is simply a holding position. Once we know the powers granted by the next Westminster government, the party’s manifesto for Holyrood 2016 will have to fill in the gaps.

If it doesn’t it will be ripped to shreds not just by a hostile media. Two thirds of the SNP’s members are new, and lean towards a left social-democratic future for Scotland; while what survives of the Scottish Labour Party after 7 May is likely to be more left wing than in the recent past.

Because all English journalism on Scotland is immediately attacked for of bias, let me say here I think the SNP’s implied sequence of Barnett-funded deficits, followed by fiscal autonomy, balanced budgets and a surplus-driven wealth fund are all possible.

But they imply a monetary policy corollary that is not stated, and are reliant on levels of growth that are impossible to guarantee, and the ability to control industrial, migration and infrastructure policy on a scale not envisaged by Westminster.

Now for what this means for the unionist political elite of Westminster.

If Nicola Sturgeon gains a mandate for this manifesto in Scotland, it does not matter how incoherent the IFS thinks it is: the same body has slammed Labour, the Lib Dems and the Conservatives for failing to come clean on much bigger budget anomalies in their own manifestos.

Full fiscal autonomy

What matters is that, come 8 May, large numbers – maybe even a majority – of Scottish people will have voted for a programme of full fiscal autonomy.

It will be a different vote to the 18 September one, with a lower turnout, but it will be a mandate – something the yes campaign did not achieve last year.

During the referendum campaign I met many Labour-supporting Scots who were voting no because their “maximum programme” was fiscal autonomy, not nationhood. So a formal mandate for that is quite a powerful thing for a Scottish first minister to possess.

Given that, the ball will then be in Westminster’s court. If you pull the stops out – the Bank of England, the boss of Sainsbury’s etc – and narrowly defeat independence, but then do not deliver fiscal autonomy, and indeed paralyse Westminster politics due to your on-principle rejection of it, that lays the basis for where things develop next.

That Scotland will dominate the first year of the next parliament is a certainty. What Scots will do if the mandate contained in the SNP manifesto is first delivered then ignored will determine whether the UK survives as a political entity.

That’s why the unionist parties are shouting so loudly today, though they cannot bring themselves to shout anything but diametrically opposed things.

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15 reader comments

Thats all pretty reasonable. Coming from an independence supporter. I think Mr Mason has this right. It’s a political manifesto to further the chances of independence.
Underpinning my view on this issue is that I want people like George Osborne to have as little power over my country’s economy as possible. Any short term issues along the way are price worth paying.

Thanks again, Paul, for a clear account of the Scottish situation. As a Yorkshireman who has lived in Scotland for 36 years, I see you are one of the few commentators who really appreciate what the People of Scotland vote for and why, even if the sums do not always appear to add up!

But the English have always underestimated the power of the Scots to succeed in the world and I think you would be surprised at how much could be generated by business here if it was freed from the yoke of the London-centred traditional status quo … even the US-controlled Trident system seems more and more a question of how far the English just want to retain their seat at the UN Security Council and punch above their weight as solace in their nostalgia for lost empire, rather than have an independent and respected voice in the world.

The Referendum changed everything through the rule of democracy and the English will have to face up to that – the Tories are now showing themselves to be totally anti-democratic in refusing to listen to what the ballot box says – only 45% voted Yes, but a majority are going to be voting SNP despite the very same fear-mongering and fiscal “blackmail” from all 4 rUK parties.

Whether ’tyke’ or ‘jock’, we understand the word “canny”, so the traditional rUK parties (who don’t realise that ‘left’ and ‘right’ are now defunct terms, especially as they have all pretended to be ‘centrists’ for so long) are not going to fool any of us.

Currently, our biggest business market – taking 70% of all of our external sales – is the rest of the UK. For example, London alone consumes more of our whisky than we do. So, in what way is that a restraint on our businesses in Scotland?
Would you have us cut off our supplies to those enthusiastic customers?

Do you have a view on how accurate/reliable the data is that the IFS relies upon for its analyses. The flaky nature of economic forecasting generally is an issue here, as is the accuracy of the disaggregation of Scotland’s economic statistics from the rest of the UK’s.

Presumably if FFA were ever to look as if it might see the light of day (and it wouldn’t according to both the main Westminster parties) then some more reliable accounting of Scotland’s economic activity would be required. Just what the taxes and other revenues actually raised in Scotland, or be reasonably allocated to Scotland, were would need to be determined more clearly than they are now…

Thanks Paul for a clear and balanced article. I am one of the new SNP members, formally a labour voter. I voted yes and have been delighted with the leadership of Nicola Sturgeon and the surge of SNP in the polls.

During the Scottish leaders debate when asked about FFA and the £7.6m gap in finances by Jim Murphy (whom I despise) I thought she was a bit weak with her answer. Nevertheless I naively presumed it was all scare stuff from the Unionists and SNP had an answer.

Since then I have been trying to find honest answers to how we can make it work, without relying on the crazy assumption of unprecedented growth, double that of the rest of the UK

Scotland’s most important variation from E&W is that our birth-rate is well below that which is needed to replace our working/tax-paying population. The number of births pa is half our peak in 1963. Whereas, births down south only trail their peak level by 3.5%. [which is why they have a shortage crisis in school places].
Since the size of working age population and skills are the key assets of any nation, and ours are in relative decline, our growth rates of output and tax revenues will continue to lag that of E&W.
Fortunately, Scotland is much better educated overall, so that our capacity to develop new commerce & wealth has been greater than in the non-SE regions of E&W. But we need more children – urgently.

Quick query: compared to England, Scotland has a large landmass with a small population and as much of this land is owned in a very concentrated fashion and often owned offshore (I’m pretty certain), a change in ownership rules to bring this land ‘onshore’ might bring in sums of money that would certainly help an independent Scotland (if not FFA Scotland)? Can anyone contribute to enlightening me on this issue (aside from sending me to Andy Wightman’s blog…)?
Plus does anyone know how the IFS figure on budget deficits was concluded?… because if it includes defence spending then there are immediate problems with it. There is also the problem of allocation of EU money in Scotland in relation to farming subsidies…a lot of money going to relatively few landowners who would benefit their neighbours more by handing the money to the locals than by claiming how much they make for the local ‘community’.
It all adds up.

Hello PhilJoMar
You’re correct: Scotland has about a third of the land mass and 8.3% of the UK population. Defence activities are allocated to those parts of the UK that are thought to be the most vulnerable, or the more useful for training.
Most of Scotland’s land area has little or no monetary value for any sort of agriculture. We rely heavily upon the EU’s CAP for the worth of our agriculture. By protecting food production and providing subsidies, we do enable all EU farmers – especially the larger ones – to enjoy high incomes at the expense of the townies. Upland sheep farming is notably reliant upon CAP subsidy. It all ends up with more money for the wealthy farmers and less for the marginal farms. [Rather like a reverse of the Poll Tax, which favoured wealthy households and penalised the low income ones]. Does it matter where the landowning capitalists live?
Agricultural set-aside payments are not made on a per hectare basis, but on the basis of the value of the potential income surrendered per hectare. So that farms in the high value output areas of the UK get more cash per hectare from the set-aside policy than those in low output areas: so that the rich get richer and the poorer get, well, poorer.
As I’m sure you’re aware, almost all of Scotland’s farmland produces less income per hectare than the high output areas elsewhere in Europe. For only that reason, the amount per hectare our farmers get is less than in those higher income areas. Go to, say, East Anglia and see that for yourself!

An interesting economic experiment is proposed: to demonstrate that it is possible to operate two quite different economic & development policies within the same currency union. Greece, Portugal, Italy and Spain have each been trying to do this. France is almost with them.
None of those experimenters has succeeded. So far at least.

Maybe a fiscally separate Scotland can succeed where so many others have failed? Wait and see.

Monetary policy is important but unfortunately govts and economists ignore/can’t grasp the importance of the finance system and how has fundamentally altered a lot of what goes on, so calls for surplus and/or balanced budgets tend to ignore the way the monetary system functions: ” The most rational and attention grabbing of MMT’s claims is that deficits are not a serious problem nor should they be our main concern at the moment. Instead they claim that no country that prints its own currency can ever be forced to default. If the debt grows too high, then it can just print money to plug the gap. The casual inverse of mainstream economic thought and public discussion is why MMT is such a radical theory. In contrary to the obsession in America with debt, MMT argues that this is missing the point. Not that debt doesn’t matter; just that it isn’t very high on the list of concerns. Nor are higher interest rates a worry. This is because printing money increases the level of reserves in a bank which then has to offer a lower interest rate in order to lend out all this extra money. So contrary to a higher interest rate, MMT claims it would receive a lower interest rate and cites Japan as an example of a country with enormous levels of debt and low interest rates.” The Scots, the Greeks etc should use this knowledge to kick back against the pricks

It is only right and proper under devo-Max for Scotland to have fiscal autonomy. However, to be successful this requires goodwill from all sides. I doubt if such will be forthcoming as that is not the way of the world.
Also I have a deep distrust of theoretical economists and sense their hands at work. The Scottish people are very talented in producing ideas and articles for trade, as my own family testify, but like everyone else they need straw to make their bricks.
The only straws I can see at present are blowing in the wind.

It always amazes me that none of this type od discussion involves the civil service. The vast majority are employed in the south east of England and contribute little to the Scottish economy. Under FFR many of these jobs would be relocated to Scotland, with either people choosing to move to Scotland from the south east or new jobs being created in Scotland. In either case these civil servants would immediately create growth in terms of additional job opportunities (both direct and indirect) increased spending power within Scotland and major opportunities in the service industries. Growth in other words.

Hello George Sutherland,
You may have overlooked the quite different geography of employment in London & the SE. In that crowded region, an exceptionally high proportion of workers commute into London from all over the South-East, the Midlands and the West.
The proportion of public sector workers within the total of all workers in England and Wales is about 2/3rds of the public sector proportion in Scotland. Which is much the same throughout E&W with the exception of NE England where the proportion is closer to that of Scotland.
Were Scotland to have the same proportion of public sector employment as in E&W, our economy would be somewhat poorer.
Is that what you wish for?